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Top Defense Stocks to Buy to Beat the Market In 2020

Friday, February 7, 2020 | MarketBeat Staff
Top Defense Stocks to Buy to Beat the Market In 2020

Defense stocks are issued by companies in the defense industry. This is a $685 billion business—almost three times the annual revenue of Amazon. This should come as no surprise, since the US allocates 15% of its budget to defense.

Top Defense Companies in the World

Defense Industry

The business of defense is about as old as civilization itself. Historically, certain city-states emerged as global powers because of their professional standing armies, most noticeable among them the Roman Empire. However, even Rome fell out of power, slowing the global growth of actively standing militaries.

The first standing army in modern times was formed by France, with various European powers following suit. The advent of the Industrial Revolution made it possible to mechanize the process of creating weapons and armor. Some defense contractors emerged to fill the needs of European powers jockeying against one another in the race to colonize the world, among them Remington Arms Company, Colt, and the Naval Group.

But just as the Industrial Revolution and Colonialism spurred the first wave of defense contracting as a major business, it was the First World War that provided another surge of power to the industry. For the first time ever, tanks, planes, bombs, and machine guns became a regular part of warfare, necessitating companies to manufacture these items.

The world went to war again just two decades later, and a new wave of new tech was used to meet the needs of the times—which included radar, bigger planes, submarines, and even atomic bombs. As the war came to a close, the new powers of the US and the USSR found themselves in a standoff of mutually perceived threats. This resulted in decades of military buildup, with jet engines, intercontinental missile systems, and even a race to put a man on the Moon.

Today, the Cold War is over, but for the last several decades, the US has continued to allocate a large percentage of its budget to defense spending. This is partly due to the global involvement of its top-notch military, regarded as the best in the world.

Top Defense Companies in the World

Poised to profit from military operations are defense companies. These corporations continue to develop better technology and weaponry for the purpose of defense. You won’t find these companies among the cheap stocks to buy as they are established businesses. Many of these companies have grown quite large through mergers and acquisitions of competitors, and they enjoy consistent business from government contracts.

Lockheed Martin (NYSE: LMT) is an aerospace and defense company based in Bethesda, Maryland. The company has clients from around the world—one of its largest clients being the US military. In fact, Lockheed is the largest contractor working with the federal government, and a recipient of 10% of all funds paid from the Pentagon.

The four main branches of Lockheed’s business are aeronautics, missiles, mission systems, and space systems. However, the company is also involved with nuclear fusion, renewable energy, and healthcare. Some of its most notable products are the F-35 Lightning combat aircraft, the C-130 Hercules transport aircraft, and a wide variety of missiles. In 2018 Lockheed Martin drew in more than $53 billion in revenue.

Boeing (NYSE: BA) designs and manufactures airplanes for consumer-facing airline companies, as well as helicopters, missiles, rockets, and satellites. Its defense products for military clients are developed through its Boeing Defense, Space & Security (BDS) division. BDS is responsible for 45% of Boeing’s revenue, making Boeing the second-largest defense contractor in the world.

One of Boeing’s most famous products is the F-15, which was actually designed by McDonnel Douglass, a former rival that Boeing purchased in 1996 for a $13 billion stock deal and merger. Boeing is also the world’s largest satellite manufacturer and has defense and aerospace clients around the world, including Europe, the United Kingdom, India, and Australia. Boeing’s reputation has suffered in recent years due to shortcomings of its consumer-facing aircraft, but in 2018 the company was still able to surpass $100 billion in revenue.

Raytheon (NYSE: RTN) is the world’s largest producer of guided missiles—the most famous of which is perhaps the Tomahawk missile. The company also manufactures other weapons and electronics for military clients, accounting for 90% of Raytheon’s total revenue. Raytheon is actually the third-largest defense contractor in the US in terms of revenue, with global sales surpassing $25 billion.

Raytheon began in 1922, manufacturing refrigerator technology before switching to consumer electronics, such as vacuum tubes and auto parts. World War II caused Raytheon to shift its focus to making parts for a new technology called RADAR (incidentally, in the process accidentally discovering the microwave). By 1948, Raytheon was already manufacturing the world’s first guided missile system. In the 1980s, the company acquired Beech Aircraft Corporation and began to produce more consumer aircraft like private jets. During this time, the company also acquired a few of the product lines of British Aviation (BAE). However, as of 2007, Raytheon has mostly discontinued its production of aircraft and focused instead on missile production.

BAE Systems (LSE: BA) is a UK-based aerospace and defense contractor. It is the largest defense company in Europe and the third-largest in the world in terms of revenue (as of 2017). Formed by a merger of British Aerospace and Marconi Electric Systems, BAE Systems is Britain’s largest defense contractor. The company is also one of the six-largest defense suppliers for the US Department of Defense. BAE also does business with Australia, India, and Saudi Arabia, which account for 20% of its revenue—which was $16 billion in 2018.

In recent years, BAE has shed its shares of Airbus, while acquiring the American companies United Defense and Armor Holdings. Recent projects include a partnership with Lockheed to develop the next generation of F-15 fighters and the Queen Elizabeth Class Aircraft Carrier for short take-off and vertical landing aircraft.

Northrop Grumman (NYSE: NOC) is one of the world’s largest weapons manufacturers and providers of military tech, with annual revenues surpassing $30 billion. Northrop is frequently a winner of the coveted Collier Trophy, which is awarded to companies in aerospace and astronautics that have made significant achievements. In Northrop’s case, some of these significant achievements include the X-47B, the first unmanned, carrier-based combat aircraft, and SpaceShipOne, the first privately-financed space vehicle.

Northrop is also the company behind the B-2 Spirit, the world’s only stealth bomber (of which the US Air Force has 20). The company is currently developing the next generation of stealth bombers with the B-21 Raider, a stealth bomber with super long-range capabilities that can carry thermonuclear payloads. Other contemporary projects for Northrop include working with NASA to develop solid rocket boosters to help payloads break through the atmosphere into space, intercontinental ballistic missile systems, and the orbiting observatory of the James Webb Space Telescope.

General Dynamics (NYSE: GD) is the fifth-largest defense contractor in the US, and the sixth-largest in terms of sales as of 2019—surpassing $38 billion in revenues the year prior. The story of General Dynamics goes back to the Electric Boat Company, which manufactured the first submarines for the American Navy in 1900, and sold its designs to other navies, including those of the United Kingdom, Japan, Russia, and the Netherlands.

During WWI and WWI, the Electric Boat Company continued to manufacture submarines. As the demand for submarines declined after the war, Electric Boat Company made a decision to diversify and reorganize. The company rebranded as General Dynamics and acquired defense contractor Convair. With the purchase of Canadair, GD was poised to enter the aerospace industry. The Cold War between the US and the USSR spurred Western countries like Canada and the US to order more aircraft. GD developed a series of aircraft, like the F-14 Tomcat, in partnership with Grumman and the YF-16 Fighting Falcon and continues to make both aircraft and submarines.

L3 Harris Technologies (NYSE: LHX) provides defense contracting and IT services for command center control (such as the C6ISR system), wireless equipment, tactical radios, avionics (electrical systems on aircraft), and night vision equipment. Some of the company’s cutting-edge ventures include surveillance solutions and directed energy weapons for microwave warfare—namely, directing harmful waves of energy that can either debilitate vital electronic equipment or cause harm to humans. These frontline developments in the defense industry—formed by a merger of L3 Corporation and the Harris Corporation—helped the company become the 6th largest defense contractor in the world.

The Harris Corporation actually goes back to 1895, when the company was involved in the manufacture of printing presses and typesetting until they merged with Radiation, Inc. in 1967. Harris got involved in space-race tech like antennae, modems, and circuits. The company then doubled the size of its business by purchasing Exelis, one of its competitors.

L3 was actually formed to acquire select parts of Lockheed Martin that had previously been part of defense contractor Loral. The merger of Harris and L3 is a recent event, having taken place in 2018, combining their respective revenue power of $7.4 billion in 2016 (Harris) and 49.6 billion in 2017 (L3).

Defense ETF

It can be difficult for even the best analyst to know the aerospace and defense companies that will produce the most cash flow. Though the defense companies above are good stocks to watch, your average financial advisor is not privy to the discussions of the CEO and board of directors. Even though these defense security companies are publicly traded on Wall Street, the very nature of the security solutions sector is one that requires a security clearance to get the clearest picture of what’s going on (literally), as many of these defense stocks do big business with the US military. Add this to the regular confusion about crafting a portfolio of solid earnings and free cash flow, and defense stocks can be even more difficult to pick.

That said, you might consider purchasing shares of a defense ETF. An exchange-traded fund is sold on the stock market like a stock. However, it is similar to a mutual fund in that it’s a pool of capital from a wide number of investors in a diverse range of stocks from an industry. The SPDR S&P Aerospace & Defense ETF (XAR) might be a good place for aspiring defense investors to start. Its portfolio is a mix of large-cap, mid-cap, and small-cap stocks in the ratio of 40/40/20, and some of its biggest holdings include Northrop Gumman, Lockheed Martin, L3 Harris Technologies, and Raytheon.

Should I Invest in Defense Stocks?

You won’t find these powerful companies in a list of dollar stocks. In fact, at the time of this article, most of them had a share price in values of several hundred dollars. However, their accompanying P/E ratios were still very low, indicating that the stocks are not overpriced balloons ready to pop and become the biggest stock losers of the stock market.

Defense companies have a solid client base that gives them repeat business—namely, the militaries of powerful Western countries like the United States and the United Kingdom, with the former allocating huge portions of its budget to defense spending. Defense companies will not go through wild cyclical ups and downs like consumer discretionaries. However, investors may see the benefits of countries increasing their defense budget during times of prolonged standoff, such as the Cold War, and outright armed conflict and war.

But even in times of peace, these defense stocks are a great market investment with good growth. For example, Lockheed and Boeing have teamed up to replace many air force fleets around the world with a new joint strike fighter. The decade ahead is likely to see a continued solid growth rate among defense stocks.

Some of these companies also pay decent dividends, which is great news for long term investors looking to capitalize on a dividend investing strategy. While you never want to put all of your eggs into one basket, it doesn’t seem like a bad idea for investors to add some of these defense companies to their portfolio.

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7 Cryptocurrencies That Are Leading The Market Higher

An Influx Of Capital Is Driving Cryptocurrency Higher

There is an influx of money to the cryptocurrency market that is driving the entire complex higher. Not only is institutional interest peaking but recognition and use are on the rise as well. With Bitcoin setting new all-time highs 100% above the 2017 highs the number of new Bitcoin millionaires is on the rise too.

But Bitcoin is not the only cryptocurrency on the market today by far. The number of cryptocurrencies on the market has been growing steadily with more than 4,000 listed on Coinmarketcap alone. But that doesn’t mean they are all worth your time. Many if not most will not stand the test of time.

One way to judge the market’s interest in a cryptocurrency is its market performance gains. A cryptocurrency that is gaining in value is certainly one that you may want to own. The better method of judging the market’s interest in a cryptocurrency is the market cap. The cryptocurrency market is worth upwards of $1 trillion and growing, and most of that value is centered in the top seven. Together, the bottom 3,993 odd cryptocurrencies only account for 12% of the market and have yet to prove any lasting value.

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Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Lockheed Martin (LMT)2.2$391.12+0.1%2.66%16.85Buy$422.80
The Boeing (BA)1.3$227.98-0.2%N/A-28.89Hold$247.45
Northrop Grumman (NOC)2.2$372.87+0.3%1.56%25.50Buy$387.82
General Dynamics (GD)2.5$191.65-0.2%2.48%17.39Hold$188.44
L3Harris Technologies (LHX)2.4$218.10+0.5%1.87%36.11Buy$226.13
SPDR S&P Aerospace & Defense ETF (XAR)0.7$124.22-0.3%0.75%N/AN/AN/A
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